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Federal District Court in California holds that subcontract provision binding subcontractor to result of dispute resolution under prime contract was not an effective waiver of Miller Act rights
BlogConstruct Law

This payment dispute case arises out of a Veterans Affairs (“VA”) construction project located in Palo Alto, California. McCarthy Building Companies, Inc. (“McCarthy”) was the prime contractor, Federal Insurance Company and Travelers Casualty and Surety provided the performance and payment bonds on behalf of McCarthy mandated by the Miller Act, and DVBE Trucking and Construction Company, Inc. (“DVBE”) was McCarthy’s subcontractor. Section 11.1 of DVBE’s subcontract required that, for any dispute involving the VA, it would follow the dispute resolution procedures agreed to by McCarthy in its contract with the VA, and agreed to be bound by the result of any such dispute resolution procedures to the same degree as McCarthy.

During the project, the VA issued a notice of suspension of the work, preventing McCarthy and DVBE from beginning work as planned. The work was also delayed due to differing site conditions relating to underground utilities. As a result, both McCarthy’s and DVBE’s work was performed behind schedule, during the winter. Once performed, the work was impacted by adverse weather. McCarthy was also required to perform additional unforeseen work. McCarthy, on behalf of itself and its subcontractors (including DBVE) submitted claims to the VA for additional compensation.

While McCarthy’s claims remained pending with the Civilian Board of Contracting Appeals (“CBOCA”), the DVBE sued McCarthy, Federal Insurance Company and Travelers Casualty & Surety for recovery on the Miller Act Payment bond, breach of contract, account stated and quantum meruit. While the parties initially stipulated to stay the action pending resolution of McCarthy’s action before the CBOCA, they later agreed to lift the stay. Defendants then moved to stay the proceedings pending the outcome of McCarthy’s CBOCA appeal, arguing that Section 11.1 of the subcontract bound DVBE to the result of McCarthy’s proceeding with the VA. Defendants argued that, because the outcome of DVBE’s claim was entirely dependent on the outcome of McCarthy’s pending claim against the VA, the action should be stayed until McCarthy’s claim was resolved. In response, DVBE argued that Section 11.1 of the subcontract was not an effective waiver of its Miller Act claim.

The Court denied Defendants’ motion to stay. It concluded that it was contrary to the intent of the Miller Act to require DVBE to await, and be bound by, the result of a process in which it was not permitted to participate. The Court concluded that Section 11.1 of the subcontract would, if effective, waive DVBE’s Miller Act rights. The Court noted that an effective waiver of the Miller Act must be (1) in writing, (2) signed by the person whose right is waived, and (3) executed after the person whose right is waived has furnished labor or material for use in the performance of the contract. The Court also noted that the waiver must be clear and explicit. The Court found that Section 11.1 was not an effective waiver of DVBE’s Miller Act claim for two reasons. First, the subcontract was signed before the work began. And second, it was not a “clear and explicit” waiver of DVBE’s Miller Act rights. As such, the Court refused to enforce Section 11.1 of the subcontract and denied Defendants’ motion for stay of the proceedings.

To view the full text of the court’s decision, courtesy of Lexis ®, click here.

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